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Dow Jones- S &P Index soon be Traded in NSE Future & Option

Indian investors may soon be able to bet on the world’s most widely-tracked benchmark stock indices—whose constituents include Apple, ExxonMobil, Microsoft, Procter & Gamble, GE— through a local stock exchange, signalling an opportunity for domestic investors to diversify their investments.

Capital market regulator—Securities and Exchange Board of India, or Sebi—is close to finalising rules that will pave the way for local stock exchanges to launch equity derivative contracts on popular indices of foreign bourses. The equity derivative contracts on the S&P 500 and the Dow Jones Industrial Average (DJIA) indices will be the first to be offered to Indian investors through National Stock Exchange, or NSE.

Sebi is likely to grant an in-principle approval for launching the products probably within a month, according to a person privy to the discussions. The product details will be announced by NSE after Sebi announces the rules, this person confirmed.

To start with, NSE, which first announced its intention to unveil derivative products on US indices in March, will launch futures contracts only on both indices. A futures contract is an agreement that allows an investor to bet on the underlying asset — an index or stock— for a pre-determined price and period.

Takers likely among rich investors

The move will enable domestic investors to bet on the US markets with the help of futures without currency risks, as the product will be rupee-denominated. Brokers said local investors would be able to benefit from sharp moves in the US markets for over an hour, as futures contracts on the US bourses open for trading at about 2:00 pm IST.

Currently, resident Indians can’t invest more than $200,000, or about Rs 90 lakh, in foreign assets, according to rules set by the Reserve Bank of India. Also, they can’t trade in derivatives on foreign stock exchanges, as RBI guidelines do not permit Indians to remit foreign exchange for margins on futures and options trading overseas.

Market participants said the products would most likely find takers among wealthy local investors, who have been unable to trade US futures due to the restrictions. “It will be a portfolio diversification product for the wealthy, as US indices remain the bellwether for most markets globally,” said the managing director of a foreign broking firm’s India operations.

Domestic brokers hope that US futures on local exchange will help them attract wealthy clients, who are already trading derivatives on overseas stock exchanges, with trade settlement through the unofficial ‘hawala’ route. Some foreign broking houses also facilitate these transactions through their offices overseas.

“Only if the NSE manages to keep transaction costs for US futures contracts low, will it be able to attract the smart investors, who have been trading overseas for a while,” said the head of a domestic broking firm. Market participants expect the ‘curiosity factor’ to pull in some retail investors to trade in DJIA and S&P 500 futures on NSE initially.

Foreign institutions are unlikely to trade these contracts in India, brokers said. “Foreigners wouldn’t come to India to trade in products that are already available in their home market with better liquidity. This product is mainly for resident Indians,” the foreign broking firm’s managing director in India quoted earlier said.